Is This the End of Market Democracy?

investing in things like education that gives everybody a chance to succeed. A tax code that makes sure everybody pays their fair share. And laws that make sure everybody follows the rules. That’s what will transform our economy. That’s what will grow our middle class again.

Republicans, in turn, are denouncing the expansion of a Democratic “entitlement society” and what they see as a trend toward European social democracy. They are calling for sharply reduced taxes, regulation and government spending to free market forces and revive private sector economic growth.

While Americans are going to be able to choose between two contrasting ideologies, what if both choices are off the mark? What if the legitimacy of free market capitalism in America is facing fundamental challenges that the candidates and their parties are not addressing?

Here are some of the issues that are making some politicians and political thinkers uneasy:

Are large segments of the American workforce — millions of people — at a structural disadvantage in the face of global competition, technological advance and ever more sophisticated forms of automation? Is this situation permanent?

Will the share of profits from improving corporate productivity flowing to capital and to high-earning C.E.O.s continue to grow, while the income of wage earners stagnates and their share of profits declines?

Has the surging wealth and income of the top one percent and of the top 0.1 percent reached a tipping point at which the political leverage of the very affluent decisively outweighs the influence of the electorate at large?

Is it possible that in the United States and Europe, democratic free market capitalism is no longer capable of providing broadly shared benefits to a solid majority of workers?

These are matters of concern to many highly respected experts — people not known for leftist jeremiads. Among them are Jeffrey Sachs, a professor at Columbia University; Nobel Prize winner Michael Spence; Francis Fukuyama, senior fellow at Stanford’s Center on Democracy; former Treasury Secretary Lawrence Summers; and three of the nation’s foremost labor economists, Richard Freeman and Lawrence Katz, both of Harvard, and David Autor of M.I.T.

None of these authorities is proposing an alternative to, or radical remaking of, free market capitalism, but they are all concerned by the weakening of the social fabric associated with contemporary economic trends and with the damage that can be inflicted by market forces.

Freeman, for example, wrote in an email to The Times that increases in inequality “threaten the success of democratic capitalism.” Freeman contends that the:

economic interests of small groups of “crony capitalists” have come to dominate government responses to the financial crisis and ensuing recession. The danger is not an ever-expanding socialist state, per Hayek’s road to serfdom, but of a move to economic feudalism, in which a small set of wealthy masters dominate markets and the state and subvert or outsmart efforts to regulate their behavior or rein them in.

The rich, Freeman argues, will always use their resources to protect their interests. But now, he says, “inequality is off the charts” in the United States, giving the rich unprecedented power to influence political outcomes. This reality was forcefully driven home, Freeman says, in the aftermath of the 2008 collapse when the most culpable banks were able to extort continued control over the decisions of policy makers and legislators.

Spence wrote to The Times that capitalist market “incentives are good at efficiency, growth and innovation. They are proving weak or deficient in stability, equity and sustainability.” He warns that during the economic transformations that drive globalization:

things change in a non-cyclical way and we are not adapting fast enough. We (advanced countries broadly) are making very poor inter-temporal choices, failing to agree on who pays for what and then deciding implicitly to let our children and grandchildren pay instead.

In a paper published by the Council on Foreign Relations, Spence and co-author Sandile Hlatshwayo argue that the employment problems of the United States do not result from market failure. Just the opposite: the problems arise from an exceptionally efficient global marketplace. Instead of benefiting from the market, many in the United States, particularly those holding mid-level skill jobs that can be performed at lower cost overseas, are paying the costs of efficiency — the victims, in effect, of creative destruction.

Multinational companies, Spence and Hlatshwayo write, “are doing exactly what one would expect them to do. The resulting efficiency of the global system is high and rising. So, there is no market failure.” In the postwar period from 1946 to the mid-1970s, the United States benefited enormously from globalization, which opened new markets for American products.

“We now appear to be at a crossroads,” Spence and Hlatshwayo contend:

as emerging economies of less developed nations begin to produce goods at lower cost and often of higher quality than American-made goods. Many of those effects are positive. Consumer goods, for example, are less expensive than they would be in a less open environment. But the distributional effects may be negative. Within countries, inequality may rise. Between countries, the success of the emerging economies may impose costs on richer ones.

the benefits of the most recent waves of technological innovation have accrued disproportionately to the most talented and well-educated members of society. This phenomenon helped cause the massive growth of inequality in the United States over the past generation.

Fukuyama’s conclusion is pessimistic:

There are a lot of reasons to think that inequality will continue to worsen. The current concentration of wealth in the United States has already become self-reinforcing: as the economist Simon Johnson has argued, the financial sector has used its lobbying clout to avoid more onerous forms of regulation. Schools for the well-off are better than ever; those for everyone else continue to deteriorate. Elites in all societies use their superior access to the political system to protect their interests, absent a countervailing democratic mobilization to rectify the situation. American elites are no exception to the rule.

Sachs and Katz are somewhat more hopeful, but their optimism is based on the politically problematic proposition that the United States can adopt wage and income policies similar to those in Scandinavian countries.

Katz told The Times that

the current trajectory of technological change and globalization leads to a polarization of labor demand in rich countries increasing demand for high-end, college plus jobs using analytical skills and creativity, hollowing out traditional middle skill jobs (bottom half of college, top half of non-college) like middle management, clerical, and manufacturing production, and expanding demand for in-person services.

The United States could moderate these trends and achieve some broadly shared prosperity with increased job training, granting workers more leverage in wage bargaining, infrastructure spending, progressive taxation and an expansion of the Earned Income Tax Credit for the working poor, according to Katz. “There are international examples of moving in the direction of Scandinavia,” he notes, adding that he is hopeful “about the potential for a vibrant market economy with a strong role for government generating shared prosperity. But not for unfettered 19th century capitalism.”

Sachs, in turn, wrote The Times that in his view, “a social democracy — capitalism plus a hefty dose of state support for families, education, early childhood development, higher education, and active labor market policies — can still do the job. The performance of northern Europe, around 120 million people including Germany, Austria, the Netherlands, Denmark, Sweden and Norway, provides a good illustration of this success.” Social Democracy and Europeans’ aggressive use of government to lessen class disparities is just what Romney and most other Republicans are campaigning against. It goes without saying that the current European Union crisis leaves Obama and his allies unable to champion the European solution.

The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialized world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class. The problem is genuine.

While Summers believes that the free market can be reformed, he provides few specifics, although his doubts are explicit:

Serious questions about the fairness of capitalism are being raised. These are driven by sharp increases in unemployment beyond the business cycle – one in six of American men between 25 and 54 is likely to be out of work even after the economy recovers – combined with dramatic rises in the share of income going to the top 1 percent (and even the top 0.01 percent) of the population and declining social mobility. The problem is real and profound and seems very unlikely to correct itself untended.

Economists have been exploring the issues of inequality and mobility for decades, but the collapse of 2008 and its aftermath have intensified these concerns, leading to a stronger interest in the implications for democratic capitalism.

Autor, of M.I.T., has conducted an extensive analysis of job markets demonstrating how advances in technology and trade at times inflict substantial harm on displaced workers. Autor, in an interview, said he believes that on balance, the benefits of trade and technological advance clearly outweigh the losses, but the losses are worse than many have acknowledged, and fall with devastating force on specific populations in the workforce.

Overall, Autor has found that the combination of three trends — automation; the emergence of a trade-based international labor force; and the movement of jobs offshore — has polarized the job market. There is growth at the high and low ends, but the middle collapses:

Concretely, employment and earnings are rising in both high education professional, technical and managerial occupations and, since the late 1980s, in low-education food service, personal care and protective service occupations. Conversely, job opportunities are declining in both middle-skill, white collar clerical, administrative, and sales occupations and in middle-skill, blue-collar production, craft and operative occupations. The decline in middle-skill jobs has been detrimental to the earnings and labor force participation rates of workers without a four-year college education, and differentially so for males, who are increasingly concentrated in low-paying service occupations.

Rising exposure (to trade) increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer beneﬁt payments for unemployment, disability, retirement and healthcare also rise sharply in exposed labor markets. The deadweight loss of ﬁnancing these transfers is one to two-thirds as large as U.S. gains from trade with China.

The debate over the workings of democracy, the market, technology and globalization remains unresolved. The political system instinctively avoids this debate, despite its salience and centrality, because the political costs of engagement are likely to substantially outweigh any potential gains. At an undetermined point in the not too distant future, however, as the “gale of creative destruction” blows through the heartland, the debate will become inescapable.

Thomas B. Edsall, a professor of journalism at Columbia University, is the author of the book “The Age of Austerity: How Scarcity Will Remake American Politics,” which was published in January.

Correction: February 20, 2012An earlier version of this column mischaracterized the accomplishments of Jeffrey Sachs; he is not a Nobel Prize winner. It also reversed two letters in his given name; he is Jeffrey, not Jeffery, Sachs.

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Weekly pieces by the Op-Ed columnists Charles Blow and Ross Douthat, as well as regular posts from contributing writers like Thomas B. Edsall and Timothy Egan. This is also the place for opinionated political thinkers from all over the United States to make their arguments about everything connected to the 2012 election. Yes, everything: the candidates, the states, the caucuses, the issues, the rules, the controversies, the primaries, the ads, the electorate, the present, the past and even the future.